1. You just won the lottery! You have the tools to decide if you should take the $50,000,000 prize in equal annual installments over 20 years (beginning next year), or instead take the $24,545,369 the state is offering as an upfront, lump sum payment.
a) what discount rate did they use to derive this lump sum?
b) a bank said they will purchase the lottery ticket from you (not sure that’s legal, but stick with me), discounting the $50,000,000 payment stream at 7%. Assuming annual compounding, how much are they offering to pay you?
2. All else being equal, which of these statements is true?
a) the longer amount of time involved, the less impact that compounding interest has on the future value of an investment than the impact from using simple interest.
b) using high interest rates to discount a future value creates a lower present value than when low interest rates are used to discount a future value.
c) when deciding what interest rate to use when discounting a future payment, the risk factor of receiving that payment is irrelevant.
d) none of the above are true.